The Reserve Bank of India (RBI) has raised concerns over the significant surge in unsecured lending initiated by Non-Banking Financial Companies (NBFCs) at a recent meeting held with senior NBFC executives.
The considerable rise in unsecured lending has resulted in the RBI taking notice and looking into the factors pushing this growth.
The apex bank sought insights from NBFCs concerning the sources of demand for unsecured loans. A few NBFC CEOs also stressed the role of fintech entities in providing a fillip to the current lending scenario.
Fintechs have emerged as a game-changer of sorts when it comes to introducing innovative lending practices and expanding their reach to the last mile.
There has been an immense surge in unsecured personal loans in the NBFC landscape. Such loans accounted for more than 16.4% of the total retail portfolio of NBFCs. The proportion has been witnessing a steady upward swing in the past few years, as per the rating agency ICRA.
With a mere 12% contribution of retail loans in the financial year (FY) 2021, the unsecured loans are expected to form about 18% of the retail book by the end of FY23, as per ICRA.
The share of unsecured loans jumped to 30% of total assets under management (AMC) in FY23 from 26% in FY22 and 23% in FY21, as per the data of 12 large NBFCs compiled by India Ratings.
The AUM of these unsecured loans surged by 51% year-on-year (YoY) during the fiscal year 2023 as against 30% YoY during FY22 and -2% during FY21.
The apex bank’s worry is related to the potential risks associated with a significant rise in unsecured lending.
Such loans are comparatively riskier as there is no collateral involved. So, in a case where a borrower defaults, the lender’s ability to recover the outstanding amount remains compromised.
As default numbers mount over a period, this could pose a considerable financial burden on lending institutions, which hold the potential to destabilise the financial system in the long run.
While taking stock of the potential challenges, the central bank has directed NBFCs to exercise caution and prudence in their lending practices.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.
